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Are Current Mortgage Rates Such a Great Deal?

Anyone who has followed mortgage rates for more than just the past couple years may be in awe of today's rates. Historically, 30-year mortgage rates have averaged 8.68%. As of late 2012, they were down to 3.35%.

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But does this record low in mortgage rates necessarily make these loans a great deal for consumers? Not if you look at the big picture.

A wider gap

If you consider all consumers, both borrowers and savers, today's mortgage rates may not be as generous as they seem. Current mortgage rates may be low, but judging from today's deposit rates, they could be lower. Here are three reasons current mortgage rates are not such a great deal for consumers:

Current mortgage rates give banks a fatter-than-normal spread. Banks pay consumers an interest rate on savings accounts on other deposits, then lend some of that money out at a higher interest rate. The bank makes money on the spread between those two rates, and as low as today's mortgage rates are, rates on deposits have fallen even more steeply. According to Federal Reserve figures, the spread between mortgage rates and short-term deposit rates has averaged 2.81% since 1971. As of late 2012, it was 3.16%, and the figure has been above average since late 2008.

The price of low rates is borne by savers. The wider-than-usual spread between loan and deposit rates over the past few years is part of the Federal Reserve's strategy to shore up the health of the banking system. That may have been necessary, but it is not a cost-free cure -- the cost has been borne by depositors, who have seen deposit rates plunge from a normal level of nearly 6% to just above zero.

At times, high interest rates have been a better deal for consumers. There were times in the 1970s and early 1980s when mortgage rates were in the double-digits, but deposit rates were even higher. At those times, if you consider both savers and borrowers, banks were actually giving consumers a better deal than they are now.

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Measuring mortgage rates relative to deposit rates is one way of determining whether banks are taking more than their fair share from consumers overall. However, for people who are primarily borrowers rather than savers, the relative level of mortgage rates to deposit rates doesn't matter so much; borrowers are really only concerned with the absolute level of mortgage rates.

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On that basis, the record low levels of current mortgage rates do represent a good bargain. Even on a relative basis, if you assume that somewhere over the course of a 30-year loan interest rates will return to normal, anyone who locks in a mortgage at today's rates could find themselves borrowing for less than the bank pays for deposits over much of the life of the loan.

That's a good deal, so long as it doesn't become so systemic that it weakens the health of the banking system. If that happens, you can expect that consumers will pay again, in one way or another.